Dollar pares losses; Fed outlook dents risk

Dollar pares losses, Fed's growth outlook dents risk sentiment

By IBT Staff Reporter On 06/24/10 AT 7:32 AM

LONDON, June 24 (Reuters) - The dollar pared losses and the yen rose on Thursday, as the Federal Reserve's less optimistic outlook for growth dented risk sentiment, while the euro was hampered by Greek debt markets.

The dollar had come under some pressure in Asian trade, as investors initially took the view that the Fed's renewed pledge to keep rates on hold for an extended period would be a positive for the world economy.

But European investors chose to focus on the growth outlook, choosing to buy the yen and to a lesser extent, the dollar.

As the U.S. fiscal stimulus starts to wane, it brings back the deflationary argument. Together with weak U.S. data, there are reasons to be pessimistic and that cannot be a positive environment for risk, said Gavin Friend, currency strategist at National Australia Bank.

At 0910 GMT, the dollar was trading up around 0.2 percent on the day at 85.905 versus a currency basket .DXY, having earlier fallen to 85.595.

The FOMC statement last night was somewhat less optimistic on growth than previously and noted that underlying inflation has trended lower. We are a long way from tightening in the US, or any of the other G4 economies, Barclays analysts said in a note to clients.

In a statement at the end of a two-day meeting, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile markets in light of Europe's debt woes.

The euro traded with losses of around 0.3 percent versus the dollar EUR= at $1.2275 having risen to $1.2351 in Asia. Traders reported semi-official demand at $1.2270.

If the market was hoping for re-assurance from the FOMC they would soon be disappointed as the Federal Reserve signalled that growth was likely to disappoint over the course of the next 12 months, due in no small part from the problems in Europe, said Michael Hewson, currency analyst at CMC Markets.

Concerns over Greece were hanging over the euro zone, as the cost of protecting its government debt against default hit a record high.

The euro was down around 0.6 percent versus the yen EURJPY=R at 109.95 yen as European stocks traded with losses of around 0.85 percent .FTEU3 and US equity futures looked set for a negative open SPc1.

The yen also rose against the dollar, hitting a one-month high at 89.50 yen.

NEW AUSTRALIAN PM

The Aussie dollar AUD=D4 reversed gains after rising as high as $0.8771 after Australia's ruling Labor Party elected a new prime minister in Julia Gillard, in a bid to avoid election defeat later this year. [ID:nSGE65M0LY]

Gillard immediately offered to end a bitter dispute over a controversial super profits mining tax, saying she would throw open the door for fresh negotiations. But she stressed miners should pay more tax. [ID:nSGE65M0LY]

The Aussie slipped back to trade down 0.5 percent on the day at $0.8695, weighed by the outlook for risk.

I expect the political developments in Australia to be supportive for the Australian dollar, but today it's all about the downturn in risk appetite, National Australia Bank's Friend said.

Sterling rose to a 19-month high versus the euro EURGBP=D4 as Tuesday's tough budget in the UK was seen taking the necessary action to tackle Britain's fiscal deficit, in contrast to the nagging fiscal worries plaguing the euro zone. (Editing by Toby Chopra)